Changes to class actions and litigation funding: Good news for insurers?

Andrew Horne and Nick Frith, Minter Ellison Rudd Watts

Class actions, which under our current rules, are representative actions, are now firmly part of the New Zealand legal landscape. They are also of significant interest to insurers, both in terms of their own potential exposure (e.g. Ross v Southern Response) and perhaps more importantly, from a liability insurance perspective (e.g. D&O and product liability claims).

We predict that 2021 will see the courts continuing to focus on managing class actions cautiously while the Law Commission presses ahead with its recommendations for a statutory class action regime, having come to a preliminary view that New Zealand should develop one, and for the potential regulation of litigation funders, which are viewed as necessary for the majority of class actions. Law Commission Issues Paper

The Law Commission spent 2020 progressing its Class Actions and Litigation Funding project.

Having initiated conversations with key stakeholders, the Law Commission decided on a review from first principles, primarily because:

It is evident from [the Law Commission’s] initial conversations and research that there is no broad consensus on the desirability of a class actions regime or litigation funding, nor on the extent to which, or how, they should be regulated.

The Law Commission’s work culminated in a 376-page Issues

Paper to: ‘… facilitate consultation and feedback on whether the potential benefits of class actions and litigation funding can be realised in a way that outweighs any risks and concerns.’ The Issues Paper is evenly divided between class actions and litigation funding. Class actions

The key to the Issues Paper is the Law Commission’s preliminary view that New Zealand should have a statutory class actions regime. The Law Commission considers that class actions provide valuable access to justice and that any disadvantages in the current system, which it considers inadequate, may be managed in a statutory regime. The goal of any regime is to “provide greater certainty, predictability and transparency of the law”.

A well-developed statutory regime, with suitable protections in place for both plaintiffs and defendants, should assist access to justice. It would provide clarity on the requirements for class actions, while potentially reducing the cost associated with the work that is currently necessary to settle procedural rules and resolve issues relating to the class approach in each case.

Published submissions are supportive of the introduction of a statutory class actions regime. A well-tailored regime could benefit all those involved in group litigation, including insurers, because it could, among other things: • Reduce or dissuade unwieldy and unmeritorious claims by requiring a certification step to ensure that class membership and common issues are clearly defined, thereby reducing the costs associated with preliminary steps. • Reduce the prospect of a multiplicity of claims on the same or similar issues (e.g. the CBL litigation). • Give courts better oversight and control of case management to ensure efficiency in proceedings. • Involve a more appropriate costs regime which would better reflect the significant cost of complex group litigation. Insured defendants would benefit from the security offered by the prospect of greater costs awards where they are successful. Litigation funding

The Law Commission’s preliminary view is that litigation funding is desirable in principle and should be expressly permitted, provided that certain identified concerns can be managed. Those concerns include funder control of litigation, managing conflicts of interest, level of funder profits, capital adequacy of funders and funder regulation.

Again, submitters appear to support the continued existence of litigation funders, subject to at least some degree of regulation. Sophisticated funders generally provide a service to class members who are unable or unwilling to fund proceedings. Less sophisticated funders may not treat plaintiffs fairly or may have conflicts of interest that are not professionally managed. Funder regulation should not concern professional funders and it should provide greater protection not only for prospective plaintiffs but also for defendants and their insurers.

Professional funders already choose cases carefully, so the risk of an increase in meritless claims through an increase in funder activity or prevalence may be low, although some have expressed concerns that funders may use the threat presented by their resources and their willingness to pursue cases to pressure defendants into unmerited settlements.

Against that, an increase in regulation, including in respect of an obligation to provide full security for costs (which could be on a higher scale than the present High Court Rules) would provide defendants and their insurers with greater costs certainty.

Any funder regulation must maintain the balance between protecting litigants’ and the public’s interests and ensuring access to justice with discouraging unmeritorious claims and ensure that defendants are also treated fairly.